Fed Rate Cut: Not Such A Sure Thing?
A decidedly negative tone has replaced Monday's complacency as the Fed starts its two-day meeting today. A Wall Street Journal article detailingwhy a rate cut isn't a sure thing has put traders on edge and cast doubt about the cut to the Fed funds rate that most of them think is a "sure thing."
Wall Street heads lower after a down day in Europe's stock markets. Asian markets were mixed.
The Wall Street Journal article was written by veteran Fed reporter Greg Ip, who will be a guest on CNBC's "Squawk on the Street" today. Ip said while the market believes a rate cut is a near certainty, the Fed is deciding between a quarter point reduction and no cut at all. The article is a balanced assessment of the Fed's decision making process, but the headline has some traders just plain spooked.
"Today's trade is focused on the Greg Ip article," says Andy Brenner of M.F. Global. "Ip is trying to reframe the Fed outlook from a 25 to 50 basis cut tomorrow to a no cut to 25 outlook. If Ip has some good insight from the Fed and is right, the market will be dramatically disappointed."
Brenner made the comments in a note this morning. "Either the Fed knows something we don't or they will take an unnecessary risk. Based on this outlook, we would expect the curve to flatten over the next 36 hours as investors reconsider the Fed outlook."
But CNBC's Steve Liesman says there's a strong argument for the cut that Wall Street is convinced will be announced at the end of the Fed's meeting Wednesday afternoon.
"I've always thought it was a close call, but on balance there are three factors I'm looking most closely at. First, home building, default rates and prices have taken another dangerous leg down. Credit markets remain unsettled, not returned to normal, and corporate commentary in earnings have signaled concern about the the consumer," says Liesman.
Liesman said a survey of primary dealers also shows that 17 of 21 are looking for a rate cut.
"The one advantage of not cutting is to provide a psychological boost the market but they could boost it in other ways. The best guess right now is you're going to have growth fall off substantially," said Liesman.
Oil is weaker this morning, taking a breather from its record run. Traders are watching tropical storm Noel which caused flooding and mud slides in the Dominican Republic.
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